Quarterly
report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the Quarter Ended June 30, 2007 Commission File No.
000-21429

ArQule,
Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware

04-3221586

(State of
Incorporation)

(I.R.S. Employer
Identification Number)

19 Presidential Way, Woburn,
Massachusetts 01801

(Address of
Principal Executive Offices)

(781) 994-0300

(Registrants Telephone Number, including Area Code)

Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes x No o

Indicate
by check mark whether the registrant is large accelerated filer, an accelerated
filer, or a non-accelerated filer. See
definition of accelerated filer and large accelerated filer in Rule 12b-2 of
the Exchange Act. (Check One)

Large accelerated filer o Accelerated
filer x Non-accelerated
filer o

Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x

Number of shares outstanding of the registrants Common Stock as of
August 2, 2007:

The accompanying
notes are an integral part of these interim unaudited financial statements.

5

ARQULE, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

1. NATURE OF OPERATIONS AND BASIS OF
PRESENTATION

We are a clinical-stage
biotechnology company organized as a Delaware Corporation in 1993 and are
engaged in the research and development of innovative anti-cancer therapies.
Our goal is to introduce novel products that act selectively against cancer
cells, target multiple tumor types and are well tolerated by patients.

We retain full worldwide
commercial rights to ARQ 197 outside of Japan and other select Asian countries,
where we granted commercial rights to Kyowa Hakko Kogyo Co., Ltd. (Kyowa) on
April 27, 2007. We are developing ARQ
501, ARQ 171 and ARQ 761, a new chemical entity based on ARQ 501, pursuant to
our collaboration with Hoffmann-La Roche (Roche). Our agreements with Kyowa
and Roche each provide for possible future milestone payments, royalties on
product sales, and development funding, in addition to upfront payments that we
have already received.

As part of our business
since inception until 2006, we provided chemistry services to collaborators and
customers for their discovery programs. In September 2005, we announced a
strategic decision to exit our chemistry services operations in order to focus
operationally on developing our oncology portfolio. On December 2, 2005, we
received notice that our major collaborator and customer, Pfizer Inc (Pfizer),
pursuant to the terms of the Collaborative Agreement (Agreement) with ArQule,
was terminating the Agreement effective on May 22, 2006. We continued to
provide chemistry services to Pfizer through this date.

We have prepared the
accompanying condensed consolidated financial statements pursuant to the rules
and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to these
rules and regulations. These condensed
consolidated financial statements should be read in conjunction with our
audited financial statements and footnotes related thereto for the year ended
December 31, 2006 that are included in our annual report on Form 10-K filed
with the SEC on March 12, 2007.

The unaudited condensed
consolidated financial statements include, in our opinion, all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
our financial position as of June 30, 2007, and the results of our operations
and cash flows for the three and six months ended June 30, 2007 and June 30,
2006. The results of operations for such interim periods are not necessarily
indicative of the results to be achieved for the full year.

2. DISCONTINUED
OPERATIONS

On September 27, 2005, we
announced our intention to exit our chemistry services operations. We received
notice on December 2, 2005 that Pfizer had elected to terminate the Agreement,
pursuant to the Agreements terms, effective on May 22, 2006. The Agreement
provided for six months prior written notice by either party to the other for
termination without cause and, in the event of termination by Pfizer, certain
payments to us. In accordance with these provisions, we received approximately
$19.8 million in December 2005 in connection with the termination. This amount
was recorded as deferred revenue and was recognized as revenue when compounds
were delivered through the termination date. We have fulfilled our compound
production obligations under the Agreement, and recognized the remaining
deferred revenue and ceased chemistry services operations in 2006.

The net book value of the
assets associated with the chemistry services operations, which totaled $1.4
million, approximated the fair market value of the underlying assets. In
December 2006, management completed the
sale of the chemistry services assets, which consisted of commercially
available laboratory instrumentation, for approximately $1.3 million, net of
direct costs to sell such assets.

6

We considered the
chemistry services asset group to be a component of an entity, as defined in
Statement of Financial Accounting Standards No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets (SFAS 144),
since it comprised operations and cash flows that were clearly distinguished,
both operationally and for financial reporting purposes, from the remainder of
our operations. Pursuant to SFAS 144, we reported the results of the chemistry
services component as discontinued operations, since the related cash flows had
been eliminated from our ongoing operations and we did not have any significant
continuing involvement in the operations of the component or the assets that
were disposed.

The following table
presents operating results for the discontinued chemical services operations:

Three Months Ended
June 30,

Six Months Ended
June 30,

2007

2006

2007

2006

Revenue

$



$

4,918

$



$

26,718

Costs and expenses:

Cost of revenue



2,527



8,345

Restructuring charge



551



2,528

Total costs and expenses



3,078



10,873

Income
from discontinued operations

$



$

1,840

$



$

15,845

3. KYOWA
LICENSING AGREEMENT

On April 27, 2007,
we entered into an exclusive license agreement with Kyowa to develop and
commercialize ARQ 197, a small molecule, selective inhibitor of the c-Met
receptor tyrosine kinase, in Japan and parts of Asia. A $3 million portion of
an upfront licensing fee was received by the Company under this agreement in
the first quarter of 2007 and recorded as deferred revenue at March 31, 2007.
An additional $27 million in upfront licensing fees was received on May 7, 2007
and recorded as deferred revenue at June 30, 2007. The agreement includes $123
million in upfront and potential development milestone payments from Kyowa to
ArQule, including the $30 million cash upfront licensing payments. In addition,
the agreement includes sales milestone payments. Upon commercialization, ArQule
will receive double-digit royalties from Kyowa on net sales of ARQ 197. Kyowa
will be responsible for all clinical development costs and commercialization of
the compound in certain Asian countries, consisting of Japan, China (including
Hong Kong), South Korea and Taiwan.

Under the Kyowa
agreement, the initial license fee and any subsequent milestone payments, once
earned, will be recognized as research and development revenue using the
contingency-adjusted performance model. Under this model, when payments are
earned, revenue is immediately recognized on a pro-rata basis in the period we
achieve the milestone based on the time elapsed from inception of the Kyowa
agreement to the time the milestone is earned over the estimated duration of
the development period under the agreement. Thereafter, the remaining portion
of the milestone payment is recognized on a straight-line basis over the
remaining estimated development period under the agreement. We currently estimate the
development period to be through April 2016. This period may ultimately be
shorter or longer depending upon the outcome of the development work, resulting
in accelerated or deferred recognition of the development revenue. Royalty
payments will be recognized as revenue when earned. The cost associated with
satisfying the Kyowa contract is included in research and development expense
in the Condensed Consolidated Statement of Operations.

4. COMPREHENSIVE LOSS

Comprehensive loss
is comprised of net loss and other comprehensive income (loss). Other comprehensive income (loss) includes
unrealized gains (losses) on our available-for-sale securities that are
excluded from net loss. Total
comprehensive loss for the three and six months ended June 30, 2007 and June
30, 2006 was as follows:

Three Months Ended

Six Months Ended

June 30,

June 30,

2007

2006

2007

2006

Net loss

$

(13,361

)

$

(7,574

)

$

(27,865

)

$

(3,288

)

Unrealized gain
on marketable securities

36

207

115

219

Comprehensive loss

$

(13,325

)

$

(7,367

)

$

(27,750

)

$

(3,069

)

7

5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable
and accrued expenses include the following at June 30, 2007 and December 31,
2006:

June 30,

December 31,

2007

2006

Accounts payable

$

667

$

208

Accrued payroll

1,772

1,726

Accrued
outsourced pre-clinical and clinical fees

5,862

6,197

Accrued
professional fees

657

434

Accrued
restructuring-current portion

650

678

Other accrued
expenses

538

1,033

$

10,146

$

10,276

6. RESTRUCTURING CHARGES

In 2002, we
recorded a restructuring charge associated with abandoning our facility in
Redwood City, California, which was comprised of the difference between the
remaining lease obligation, which runs through 2010, and our estimate of
potential future sublease income. The
accrual balance was adjusted in 2003 to reflect a change in estimate due to
continued deterioration in the local real estate market. The accrual balance was adjusted again in
2004 as a result of us entering into a sublease for the facility. The remaining facility-related restructuring
accrual is primarily comprised of the difference between our lease obligation
for this facility, which will be paid out through 2010, and the amount of
sublease payments we will receive under our sublease agreement.

On January 19,
2006, our Board of Directors authorized termination benefits for employees in
connection with a plan of termination for our chemistry services operations.
The termination benefits, which affected 104 employees, consisted of cash
payments and continuation of health care benefits. In 2006, a restructuring
charge of $2.5 million was recorded pursuant to this action and is included in
the Condensed Consolidated Statement of Operations, for the six months ended
June 30, 2006, as part of Income from discontinued operations. As of December
31, 2006, all affected employees had been separated from the Company and the
restructuring costs were fully paid.

Activities against
the restructuring accrual in the six months ended June 30, 2006 and June 30,
2007 were as follows:

Balance as of

2006

2006

Balance as of

December 31, 2005

Provisions

Payments

June 30, 2006

Termination
benefits-discontinued operations

$



$

2,383

$

(1,326

)

$

1,057

Other
charges-discontinued operations



145

(98

)

47

Facility-related

2,706



(266

)

2,440

Total
restructuring accrual

$

2,706

$

2,528

$

(1,690

)

$

3,544

Balance as of
December 31, 2006

2007
Provisions

2007
Payments

Balance as of
June 30, 2007

Facility-related

$

2,044

$



$

(341

)

$

1,703

7. NET INCOME (LOSS) PER SHARE

Net loss per share
is computed using the weighted average number of common shares outstanding.
Basic and diluted net income (loss) per share amounts are equivalent for the
periods presented as the inclusion of potential common shares in the number of
shares used for the diluted computation would be anti-dilutive to loss per
share from continuing operations. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings Per Share,
no potential common shares are included in the computation of any diluted per
share amounts, including income (loss) per share from discontinued operations,
as the Company reported a net loss from continuing operations for all periods
presented. Potential common shares, the shares that would be issued upon the
exercise of outstanding stock options, were 4,454,291 and 4,383,984 for the
three and six months ended June 30, 2007 and 2006, respectively.

8

8. STOCK-BASED COMPENSATION AND STOCK PLANS

Effective January
1, 2006, we adopted the provisions of SFAS No.123(R), Share-Based Payment
(SFAS 123 (R)), which establishes accounting for equity instruments exchanged
for employee services. Under the provisions of SFAS 123(R), stock-based
compensation cost is measured at the grant date, based on the calculated fair
value of the award, and is recognized as an expense over the employees
requisite service period (generally the vesting period of the equity grant).

We estimate the
fair value of stock options using the Black-Scholes valuation model. Key input
assumptions used to estimate the fair value of stock options include the
exercise price of the award, expected option term, expected volatility of our
stock over the options expected term, risk-free interest rate over the
options expected term, and the expected annual dividend yield. We believe that
the valuation technique and approach utilized to develop the underlying
assumptions are appropriate in calculating the fair values of our stock options
granted in the three and six months ended June 30, 2007 and June 30, 2006.

The following
table presents stock-based compensation expense included in our Condensed
Consolidated Statements of Operations:

Three Months Ended
June 30,

Six Months Ended
June 30,

2007

2006

2007

2006

Research and
development

$

361

$

328

$

1,381

$

751

General and administrative

688

522

1,030

763

Discontinued
operations



46



337

Total
stock-based compensation expense

$

1,049

$

896

$

2,411

$

1,851

In the three and
six months ended June 30, 2007 and June 30, 2006, no stock-based compensation
expense was capitalized and there were no recognized tax benefits associated
with the stock-based compensation charge. In the six months ended June 30,
2007, stock-based compensation expense of $637, included in research and
development, was related to Boston Biomedical, Inc. transition costs (see Note
11, Boston Biomedical, Inc. Collaboration in this Form 10-Q)

Option activity
under our stock plans for the six months ended June 30, 2007 was as follows:

Stock Options

Number
of Shares

Weighted Average
Exercise Price

Outstanding as
of December 31, 2006

3,872,946

$

6.66

Granted

1,145,325

6.47

Exercised

(268,739

)

5.01

Cancelled

(295,241

)

6.33

Outstanding as
of June 30, 2007

4,454,291

$

6.73

Exercisable as of June
30, 2007

2,299,370

$

7.36

The aggregate
intrinsic value of options outstanding at June 30, 2007 was $5.3 million, of
which $3.1 million related to exercisable options. The weighted average fair
value of options granted in the six months ended June 30, 2007 and 2006 was
$3.40 and $4.09 per share, respectively. The intrinsic value of options
exercised in the six months ended June 30, 2007 and 2006 was $989,936 and
$370,000.

The total
compensation cost not yet recognized as of June 30, 2007 related to non-vested
option awards was $7.0 million, which will be recognized over a
weighted-average period of 2.9 years. During the six months ended June 30,
2007, there were 259,199 shares forfeited with a weighted average grant date
fair value of $4.04 per share. The weighted average remaining contractual life
for options exercisable at June 30, 2007 was 5.8 years.

9

9. STOCK OFFERING

On June 13, 2007,
we sold 7 million shares of common stock at $7.75 per share for aggregate net
proceeds of approximately $50.5 million
after commissions and other offering expenses. On July 18, 2007, we sold an
additional 502,000 shares of common stock at $7.75 per share for aggregate net
proceeds of approximately $3.7 million after commissions and other offering expenses.

10. RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006,
the Financial Accounting Standards Board (FASB) issued SFAS No. 157 (SFAS
157), Fair Value Measurements. SFAS 157
defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosures about fair value
measurements. This accounting standard is effective for fiscal years beginning
after November 15, 2007. The adoption of SFAS 157 is not anticipated to have a
material effect on our financial position or results of operations.

In February 2007,
the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, or SFAS 159, which is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. Early adoption is permitted as of the beginning of a fiscal
year that begins on or before November 15, 2007, provided the entity also
elects to apply the provisions of FASB Statement No. 157, Fair Value
Measurements. SFAS 159 provides companies with an option to report
selected financial assets and liabilities at fair value. The Statement also
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. SFAS 159 requires companies to provide
additional information that will help investors and other users of financial
statements to more easily understand the effect of the companys choice to use
fair value on its earnings. It also requires entities to display the fair value
of those assets and liabilities for which the company has chosen to use fair
value on the face of the balance sheet. The implementation of SFAS 159 is not
expected to have a material impact on the Companys financial statements.

In June 2007, the
Emerging Issues Task Force (EITF), reached a consensus on EITF Issue No.
07-03, Accounting for Nonrefundable Advance Payments for
Goods or Services to Be Used in Future Research and Development Activities.
EITF 07-03 concludes that non-refundable advance payments for future research
and development activities should be deferred and capitalized until the goods
have been delivered or the related services have been performed. If an entity
does not expect the goods to be delivered or services to be rendered, the
capitalized advance payment should be charged to expense. This consensus is
effective for fiscal years beginning after December 15, 2007. The initial adjustment to reflect the effect of
applying the consensus as a change in accounting principle would be accounted
for as a cumulative-effect adjustment to retained earnings as of the beginning
of the year of adoption. We do not
believe that our adoption of EITF 07-03 in the first quarter of 2008 will have
a material impact on our financial statements.

11. BOSTON BIOMEDICAL, INC.
COLLABORATION

In January 2007,
we entered into a $5.0 million, eight-month sponsored research agreement with
the newly established Boston Biomedical, Inc. (BBI), an independent
corporation led by our former chief scientific officer. Approximately 26 former
employees of ArQule joined BBI.

BBI is conducting
scientific research under the agreement that includes a number of in vivo and in vitro
studies, reports and publications related to mechanisms of action and
biomarkers for our clinical-stage products. These products include ARQ 197, ARQ
501 and ARQ 171. We retain all intellectual property and technology rights
related to research conducted by BBI employees under the contract. ArQule has
no equity position in BBI.

In connection with
the foregoing events, on January 26, 2007, our former chief scientific officer
entered into a separation agreement and general release with us and was paid a
lump sum severance payment comprised of (i) one years salary in the amount of
$321, (ii) the average of his cash bonuses over the last two years in the
amount of $110, and (iii) the amount of $113 to which he was entitled under our
Annual Incentive Program for fiscal year 2006.

In addition, he
was granted an option to purchase 64,375 shares of our common stock, which is
fully vested and exercisable on the date of grant and will expire on December
31, 2008. His previously vested option grants covering 216,250 shares were
amended to extend the exercise period through December 31, 2007. In connection
with his appointment as Chairman of our Scientific Advisory Board, he was
granted an additional option to purchase 12,500 shares, which is fully

10

vested and exercisable on
the date of grant and will expire ten years after the date of grant. As a
result of his separation from service, all his unvested options have lapsed.

Approximately 26
of our former employees joined BBI in January 2007 and each employee who
transitioned to BBI executed and delivered a separation agreement and general
release. In consideration for entering into such agreement, each employee
received a fully-vested option to purchase shares of our common stock with an
exercise period terminating December 31, 2008, as well as an amendment to their
previously vested stock options to extend the exercise period through December
31, 2007. The total number of fully vested stock options issued to these
employees was 87,500, and the total number of stock options that were amended to
extend the exercise period was 92,504. As a result of separation of service all
unvested options of such employees have lapsed.

In the first
quarter of 2007, we expensed approximately: $431 related to lump sum cash
payments under the separation and general release agreement with our former
chief scientific officer, as well as certain non-cash charges for stock based
compensation, including $201 for stock options granted to him; and $168 arising
from the extension of the exercise period of his vested options. Additionally,
in the first quarter of 2007, we expensed approximately $197 for stock options
granted to other employees related to their separation agreements and releases,
and $71 arising from the extension of the exercise period of their vested options.

Through June 30,
2007, in conjunction with the sponsored research agreement we made payments of
$3,372 to BBI, $3,103 of which is included in research and development expense.
The remaining $269 is reported in prepaid expenses and other current assets.

12. INCOME TAXES

We adopted the
provisions of FASB Interpretation No. 48 (FIN 48) Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109
(SFAS 109) on January 1, 2007. As a
result of the implementation of FIN 48, we recorded no adjustment for
unrecognized income tax benefits. At the
adoption date of January 1, 2007 and also at June 30, 2007, we had no
unrecognized tax benefits. We do not
expect that the total amount of unrecognized tax benefits will significantly
increase in the next twelve months.

We recognize
interest and penalties related to uncertain tax positions in income tax
expense. As of June 30, 2007, we had no
accrued interest or penalties related to uncertain tax positions. The tax years
2003 through 2006 remain open to examination by the major taxing jurisdictions
to which we are subject, which is primarily the U.S.

As of December 31,
2006, we had federal net operating loss (NOL), state NOL, and research and
development (R&D) credit carryforwards of approximately $126,104, $75,723
and $13,724 respectively, which can be used to offset future federal and state
income tax liabilities and expire at various dates through 2026. Federal net capital loss carryforwards of
approximately $5,000 can be used to offset future federal capital gains and
expire at various dates through 2008.

Utilization of NOL
and R&D credit carryforwards may be subject to a substantial annual
limitation due to ownership change limitations that have occurred previously or
that could occur in the future provided by Section 382 of the Internal Revenue
Code of 1986, as amended, as well as similar state provisions. These ownership changes may limit the amount
of NOL and R&D credit carryforwards that can be utilized annually to offset
future taxable income and tax, respectively.
In general, an ownership change, as defined by Section 382, results from
transactions increasing the ownership of certain shareholders or public groups
in the stock of a corporation by more than 50 percentage points over a
three-year period. Since the Companys
formation, the Company has raised capital through the issuance of capital stock
on several occasions which, combined with the purchasing shareholders
subsequent disposition of those shares, may have resulted in a change of
control, as defined by Section 382, or could result in a change of control in
the future upon subsequent disposition.
The Company has not currently completed a study to assess whether a
change of control has occurred or whether there have been multiple changes of
control since the Companys formation due to the significant complexity and
cost associated with such study and that there could be additional changes in
control in the future. If we have experienced
a change of control at any time since Company formation, utilization of our NOL
or R&D credit carryforwards would be subject to an annual limitation under
Section 382. Any limitation may result
in expiration of a portion of the NOL or R&D credit carryforwards before
utilization. Further, until a study is
completed and any limitation known, no amounts are being presented as an
uncertain tax position under FIN 48.

11

ITEM
2. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

We are a clinical-stage
biotechnology company organized as a Delaware Corporation in 1993 and are
engaged in the research and development of innovative anti-cancer therapies.
Our goal is to introduce novel products that act selectively against cancer
cells, target multiple tumor types and are well tolerated by patients. We
believe our clinical-stage products represent potential best-in class or
first-in class small molecule candidates based on highly differentiated
mechanisms of action.

We retain full
worldwide commercial rights to ARQ 197 outside of Japan and other select Asian
countries, where we granted commercial rights to Kyowa Hakko Kogyo Co., Ltd.
(Kyowa) on April 27, 2007. We are developing ARQ 501, ARQ 171 and ARQ 761, a
new chemical entity based on ARQ 501, pursuant to our collaboration with
Hoffmann-La Roche (Roche). Our agreements with Kyowa and Roche each provide
for possible future milestone payments, royalties on product sales, and
development funding, in addition to upfront payments that we have already
received.

Our pre-clinical
programs are directed toward molecular targets that we believe play critical
roles in the development of human cancers. The most advanced of these programs
is focused on the development of an inhibitor of the B-RAF kinase. Toxicology
testing is planned to begin in late 2007 with a product candidate from this
program. Select additional molecular
targets being explored in our pre-clinical programs include Eg5, Hsp90 and
HDAC. We may elect to out-license certain product candidates discovered through
our pre-clinical programs to corporate partners.

Our products and
research programs are based on our understanding of biological processes that
lead to the proliferation and metastasis of cancer cells, combined with our
ability to generate product candidates possessing certain pre-selected
drug-like properties and acting specifically against cancer cells. We believe
that these qualities, when present from the earliest stages of product
development, increase the likelihood of producing safe, effective and
marketable drugs. We believe that our combined expertise in biology and
chemistry differentiates us from other biotech companies.

In September 2005,
we announced a strategic decision to exit our chemistry services operations in
order to focus operationally on developing our oncology portfolio. We continued to provide chemistry services to
Pfizer Inc (Pfizer) under a previous agreement until May 2006, at which time
the collaboration with Pfizer was terminated, and we ceased chemistry services
operations. We are retaining and
continuing to use a broad spectrum of well-established chemistry capabilities
in the discovery and development of our oncology portfolio.

We have an
accumulated deficit of $256 million at June 30, 2007. We expect research and
development costs to increase throughout 2007 due to clinical testing of our
lead product candidates. Although we have generated positive cash flow from
operations for the six consecutive years from 2000-2005, these cash flows were
attributable to our discontinued chemistry services operations. We recorded a
net loss for all but one of those years. We recorded a net loss for 2006 and
expect a net loss for 2007.

Our revenue
consists of development funding from our alliance with Roche and license fee
and development revenues from Kyowa. Under this Roche alliance, we are responsible
for advancing drug candidates from early stage development to Phase 2 trials.
Roche may opt to license worldwide rights for the development and
commercialization of products resulting from this collaboration by paying an
option fee. Assuming the successful development and commercialization of a
compound under the program, we could receive up to $276 million in
pre-determined payments, plus royalties based on net sales. Additionally, we
have the option to co-promote products in the U.S.

12

On April 27, 2007,
we entered into an exclusive license agreement with Kyowa to develop and
commercialize ARQ 197, a small molecule, selective inhibitor of the c-Met
receptor tyrosine kinase, in Japan and parts of Asia. A $3 million portion
of an upfront licensing fee was received by the Company under this agreement in
the first quarter of 2007 and recorded as deferred revenue at March 31, 2007.
An additional $27 million in upfront licensing fees was received on
May 7, 2007. The agreement includes $123 million in upfront and
potential development milestone payments from Kyowa to ArQule, including the
$30 million cash upfront licensing payments. In addition, the agreement
includes sales milestone payments. Upon commercialization, ArQule will receive
double-digit royalties from Kyowa on net sales of ARQ 197. Kyowa will be
responsible for all clinical development costs and commercialization of the
compound in certain Asian countries, consisting of Japan, China (including Hong
Kong), South Korea and Taiwan.

Revenue and
expenses fluctuate from quarter-to-quarter based upon a number of factors,
notably the timing and extent of our cancer-related research and development
activities together with the duration and outcomes of our clinical trials.

Revenue from our
chemistry services operations ceased in the second quarter of 2006 as a result
of our strategic decision to exit this business and the subsequent decision by
Pfizer to terminate its Agreement with us effective on May 22, 2006. From December 2001 until that date, we produced for Pfizer annually an
average of approximately 160,000 synthetic chemical compounds and received
average annual cash payments of approximately $50 million for those compounds
and related services. The Agreement provided for six months prior written
notice by either party to the other for termination without cause and, in the
event of termination by Pfizer, certain payments to us. In accordance with
these provisions, we received approximately $19.8 million in December 2005 in
connection with the termination.

LIQUIDITY AND CAPITAL RESOURCES

June 30,

December 31,

Increase (decrease)

2007

2006

$

%

(in millions)

Cash, cash equivalents
and marketable securities

$

151.5

$

95.8

$

55.7

58.1

%

Working capital

132.8

80.6

52.2

64.9

%

Q2 YTD 2007

Q2 YTD 2006

Increase (decrease)
$

(in millions)

Cash flow from:

Operating activities

$

3.9

$

(21.4

)

$

25.3

Investing activities

(55.0

)

38.9

(93.9

)

Financing activities

52.0

0.6

51.4

Cash flow from operating
activities. Our uses of cash for operating
activities have primarily consisted of salaries and wages for our employees,
facility and facility-related costs for our offices and laboratories, fees paid
in connection with pre-clinical and clinical studies, laboratory supplies and
materials and professional fees. The sources of our cash flow from operating
activities have consisted primarily of payments from our collaborators for
services performed or upfront payments for license rights or future services.
For the six months ending June 30, 2007, our increase in cash was primarily
driven by the difference between cash receipts from collaborators, and payments
for operating expenses which resulted in a net cash inflow of $3.9 million.

Cash flow from investing
activities. Our net cash used by investing
activities of $55.0 million in the six months ended June 30, 2007 was comprised
of net sales of marketable securities of $54.6 million and acquisitions of
fixed assets of $0.4 million. The composition and mix of cash, cash equivalents
and marketable securities may change frequently as a result of the Companys
constant evaluation of conditions in financial markets, the maturity of
specific investments and our near term liquidity needs.

Cash flow from financing
activities.Our net
cash provided by financing activities of $52.0 million in the six months ended
June 30, 2007 was comprised primarily of the proceeds from our June 19, 2007
stock offering, wherein we sold 7 million shares of common stock at $7.75
per share for aggregate net proceeds of $50.5 million after commissions
and offering expenses. Stock option
exercises provided additional cash inflow of $1.5 million.

Although we were
cash flow positive from operations from 1999 through 2005, we were not cash
flow positive from operations in 2006, nor do we expect to be cash flow
positive from operations for 2007, as a result of our decision to exit our
chemistry services operations and the increased cost of developing our clinical
candidates. We expect that our available cash and marketable securities,
together with cash from operations and investment income, will be sufficient to
finance our

13

working capital and
capital requirements into the second half of
2009, depending on decisions we may make regarding our clinical trials.

Our cash
requirements may vary materially from those now planned depending upon the
results of our drug discovery and development strategies, our ability to enter
into additional corporate collaborations and the terms of such collaborations,
results of research and development, unanticipated required capital
expenditures, competitive and technological advances, acquisitions and other
factors. We cannot guarantee that we will be able to develop any of our drug
candidates into a commercial product. It
is likely we will need to raise additional capital or incur indebtedness to
continue to fund our operations in the future. Our ability to raise additional
funds will depend on financial, economic and market conditions and other
factors, many of which are beyond our control. There can be no assurance that
sufficient funds will be available to us when required, on satisfactory terms,
or at all. If necessary funds are not available, we may have to delay, reduce
the scope of, or eliminate some of our development programs, potentially
delaying the time to market for any of our product candidates.

Our contractual
obligations were comprised of the following as of June 30, 2007 (in thousands):

Payment due by period

Contractual Obligations

Total

Less than
1 year

1-3 years

3-5 years

More than
5 years

Operating lease
obligations

$

27,650

$

3,842

$

7,647

$

7,048

$

9,113

Purchase
obligations

7,350

7,350







Total

$

35,000

$

11,192

$

7,647

$

7,048

$

9,113

Included in the
total minimum payments for operating leases is approximately $1.7 million
related to abandoned real estate in California, net of contractual sublease
income. This net amount has been accrued as a liability as a part of the
Companys restructuring charge in 2002 and subsequently adjusted in 2003 and
2004 (see Note 6 Restructuring Charges to the Condensed Consolidated Financial
Statements in this Form 10-Q). Purchase obligations are comprised
primarily of outsourced pre-clinical and clinical trial expenses and payments
to license certain intellectual property to support the Companys research
efforts.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

A critical
accounting policy is one which is both important to the portrayal of the
Companys financial condition and results and requires managements most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. For
additional information, please see the discussion of our significant accounting
policies in Note 3 to the Consolidated Financial Statements included in our
Annual Report on Form 10-K.

Research and Development Revenue Recognition

Under the terms of the
Roche agreement, Roche obtained an option to license ArQules E2F program in the
field of cancer therapy. Roche provided immediate research funding of $15
million, and financial support for ongoing research and development. ArQule is
responsible for advancing drug candidates from early stage development into
Phase 2 trials. Roche may opt to license worldwide rights for the development
and commercialization of products resulting from this collaboration by paying
an option fee. Assuming the successful development and commercialization of a
compound under the program, ArQule could receive up to $276 million in
pre-determined milestone payments, plus royalties based on net sales. ArQule
considers the development portion of the arrangement to be a single unit of
accounting under Emerging Issues Task Force No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables
for purposes of revenue recognition, and will recognize the initial and ongoing
development payments as research and development revenue over the maximum
estimated development period. We estimate the maximum development period could
extend until December 2009. This period may ultimately be shorter
depending upon the outcome of the development work, resulting in accelerated
recognition of the development revenue. Milestone and royalty payments will be
recognized as revenue when earned. The costs associated with satisfying the
Roche contract are included in research and development expense in the
Condensed Consolidated Statement of Operations.

On April 27,
2007, we entered into an exclusive license agreement with Kyowa to develop and
commercialize ARQ 197, a small molecule, selective inhibitor of the c-Met
receptor tyrosine kinase, in Japan and parts of Asia. A $3 million portion
of an upfront licensing fee was received by the Company under this agreement in
the first quarter of 2007 and recorded as deferred revenue at March 31, 2007.
An additional $27 million in upfront licensing fees was received on
May 7,

14

2007 and recorded as deferred revenue at June
30, 2007. The agreement includes $123 million in upfront and potential
development milestone payments from Kyowa to ArQule, including the
$30 million cash upfront licensing payments. In addition, the agreement
includes sales milestone payments. Upon commercialization, ArQule will receive
double-digit royalties from Kyowa on net sales of ARQ 197. Kyowa will be
responsible for all clinical development costs and commercialization of the
compound in certain Asian countries, consisting of Japan, China (including Hong
Kong), South Korea and Taiwan.

Under the Kyowa agreement, the initial
license fee and any subsequent milestone payments, once earned, will be
recognized as research and development revenue using the contingency-adjusted performance
model. Under this model, when payments are earned, revenue is immediately
recognized on a pro-rata basis in the period we achieve the milestone based on
the time elapsed from inception of the Kyowa agreement to the time the
milestone is earned over the estimated duration of the development period under
the agreement. Thereafter, the remaining portion of the milestone payment is
recognized on a straight-line basis over the remaining estimated development
period under the agreement. We
currently estimate the development period to be through April 2016. This period
may ultimately be shorter or longer depending upon the outcome of the
development work, resulting in accelerated or deferred recognition of the
development revenue. Royalty payments will be recognized as revenue when
earned. The cost associated with satisfying the Kyowa contract is included in
research and development expense in the Condensed Consolidated Statement of
Operations.

RESULTS OF OPERATIONS

The following are
the results of operations for the three and six months ended June 30, 2007 and
2006:

Revenue

Increase (decrease)

2007

2006

$

%

(in millions)

For the
three months ended June 30:

Research and
development revenue

$

2.2

$

1.6

$

0.6

35.2

%

For the
six months ended June 30:

Research and
development revenue

$

3.9

$

3.3

$

0.6

17.7

%

Research
and development revenue increased by $0.6 million in both the three and six
month periods due to revenue recognized in the current quarter in connection
with the Kyowa licensing agreement.

Research and development

Increase (decrease)

2007

2006

$

%

(in millions)

For the
three months ended June 30:

Research and development

$

13.1

$

9.6

$

3.5

36.9

%

For the
six months ended June 30:

Research and development

$

26.8

$

20.1

$

6.7

33.5

%

Overview

Our research and
development expense consists primarily of salaries and related expenses for
personnel, costs of contract manufacturing services, costs of facilities and
equipment, fees paid to professional service providers in conjunction with our
clinical trials, fees paid to research organizations in conjunction with
pre-clinical animal studies, costs of materials used in research and
development, consulting, license, and sponsored research fees paid to third
parties and depreciation of associated laboratory equipment. We expect our
research and development expense to increase as we continue to develop our
portfolio of oncology programs.

We have not
accumulated and tracked our internal historical research and development costs or
our personnel and personnel-related costs on a program-by-program basis. Our
employee and infrastructure resources are allocated across several projects,
and many of our costs are directed to broadly applicable research endeavors. As
a result, we cannot state the costs incurred for each of our oncology programs
on a program-by-program basis, or the cost to support our alliance

15

agreement with Roche. The
expenses incurred by us to third-parties for pre-clinical and clinical trials
in the second quarter of 2007 and since inception of each program were as
follows (in thousands):

Oncology program

Current status

Three Months Ended
June 30, 2007

Program-to-date

E2F
modulationARQ 501

Phase 2

$

1,860

$

24,000

E2F
modulationARQ 171

Phase 1

227

4,688

c-Met programARQ 197

Phase 1

3,377

10,533

Our future
research and development expenses in support of our current and future oncology
programs will be subject to numerous uncertainties in timing and cost to
completion. We test potential products in numerous pre-clinical studies for
safety, toxicology, and efficacy. We may conduct multiple clinical trials for
each product. As we obtain results from trials, we may elect to discontinue or
delay clinical trials for certain products in order to focus our resources on
more promising products. Completion of clinical trials may take several years
or more, but the length of time generally varies substantially according to the
type, complexity, novelty and intended use of a product. It is not unusual for
the pre-clinical and clinical development of these types of products to each
take nine years or more, and for total development costs to exceed $500 million
for each product.

We estimate that
clinical trials of the type generally needed to secure new drug approval are
typically completed over the following timelines:

Clinical Phase

Estimated Completion Period

Phase 1

1-2
years

Phase 2

2-3
years

Phase 3

2-4 years

The duration and
the cost of clinical trials may vary significantly over the life of a project
as a result of differences arising during clinical development, including,
among others, the following:

· the number
of clinical sites included in the trials;

· the length
of time required to enroll suitable patients;

·the
number of patients that ultimately participate in the trials;

·the
duration of patient follow-up to ensure the absence of long-term
product-related adverse events; and

·the efficacy and safety
profile of the product.

An element of our
business strategy is to pursue the research and development of a broad pipeline
of products. This is intended to allow us to diversify the risks associated
with our research and development expenditures. As a result, we believe our
future capital requirements and future financial success are not substantially
dependent on any one product. To the extent we are unable to maintain a broad
pipeline of products, our dependence on the success of one or a few products
increases.

Our strategy
includes entering into alliance arrangements with third parties to participate
in the development and commercialization of our products, such as our
collaboration agreements with Roche and Kyowa. In the event that third parties
have control over the clinical trial process for a product, the estimated
completion date would largely be under control of that third party rather than
under our control. We cannot forecast with any degree of certainty whether our
products will be subject to future collaborative arrangements or how such
arrangements would affect our development plans or capital requirements.

As a result of the
uncertainties discussed above, we are unable to determine the duration and
completion costs of our oncology programs or when and to what extent we will
receive cash inflows from the commercialization and sale of a product. Our
inability to complete our oncology programs in a timely manner or our failure
to enter into appropriate collaborative agreements could significantly increase
our capital requirements and could adversely impact our liquidity. These
uncertainties could force us to seek additional, external sources of financing
from time-to-time in order to continue with our product development strategy.
Our inability to raise additional capital, or to do so on terms reasonably acceptable
to us, would jeopardize the future success of our business.

The increase in
research and development expense in the second quarter of 2007 of $3.5 million
is primarily due to $1.9 million of costs incurred in conjunction with our
sponsored research agreement with BBI and a $2.0 million increase in

The increase in
research and development expense in the first six months of 2007 of $6.7
million is primarily due to $3.1 million of costs incurred in conjunction with
our sponsored research agreement with BBI and a $2.8 million increase in
outsourced pre-clinical, clinical and manufacturing services required to
advance our oncology programs, principally ARQ 197, ARQ 501 and ARQ 171.
In addition, in the six month period of
2007, we incurred stock-based compensation costs of $0.7 million related to the transition of
certain employees and our former chief scientific officer to BBI. At June 30, 2007, we had 65 employees dedicated
to our research and development program, down from 95 employees at June
30, 2006.

General
and administrative

Increase (decrease)

2007

2006

$

%

(in millions)

For the
three months ended June 30:

General and administrative

$

3.8

$

2.8

$

1.0

36.5

%

For the
six months ended June 30:

General and administrative

$

7.3

$

5.0

$

2.3

46.7

%

General and
administrative expense increased in the three month period primarily due to
increases of $0.4 million in personnel
related expenses, $0.3 million in professional fees and $0.3 million for facility costs, which are no longer absorbed
by the chemical services operations. General and administrative expense
increased in the six month period primarily due to increases of $1.1 million in personnel related expenses,
$0.3 million in professional fees and $0.8 million for facility costs, which are no longer absorbed
by the chemical services operations.
General and administrative headcount was 34 at June 30, 2007, compared
to 40 at June 30, 2006.

Investment
income

Increase (decrease)

2007

2006

$

%

(in millions)

For the
three months ended June 30:

Investment
income

$

1.3

$

1.3

$





%

For the
six months ended June 30:

Investment income

$

2.3

$

2.6

$

(0.3

)

(10.4

)%

Investment income
is derived from our portfolio of cash and short-term investments. Investment
income was unchanged in the three month period and decreased in the six month
period due to the decreased average portfolio balance.

Income
from discontinued operations

Increase (decrease)

2007

2006

$

%

(in millions)

For the
three months ended June 30:

Income from
discontinued operations

$



$

1.8

$

(1.8

)

(100

)%

For the
six months ended June 30:

Income from discontinued
operations

$



$

15.8

$

(15.8

)

(100

)%

The decrease in
income from the chemical services operations, discontinued operations, in the
second quarter and first six months of 2007 reflects the termination of the
Pfizer collaboration during the second quarter of 2006.

17

RECENT
ACCOUNTING PRONOUNCEMENTS

In
September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157 (SFAS 157), Fair
ValueMeasurements. SFAS 157 defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements. This accounting standard is effective for fiscal years beginning
after November 15, 2007. The adoption of SFAS 157 is not anticipated to
have a material effect on our financial position or results of operations.

In February 2007, the
FASB issued SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities, or SFAS 159,
which is effective for financial statements issued for fiscal years beginning
after November 15, 2007. Early adoption is permitted as of the beginning of a
fiscal year that begins on or before November 15, 2007, provided the entity
also elects to apply the provisions of FASB Statement No. 157, Fair Value Measurements. SFAS 159 provides
companies with an option to report selected financial assets and liabilities at
fair value. The Statement also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and liabilities.
SFAS 159 requires companies to provide additional information that will help
investors and other users of financial statements to more easily understand the
effect of the companys choice to use fair value on its earnings. It also
requires entities to display the fair value of those assets and liabilities for
which the company has chosen to use fair value on the face of the balance
sheet. The implementation of SFAS 159 is not expected to have a material impact
on the Companys financial statements.

In June 2007, the EITF,
reached a consensus on EITF Issue No. 07-03, Accounting
for Nonrefundable Advance Payments for Goods or Services to Be Used in Future
Research and Development Activities. EITF 07-03 concludes that
non-refundable advance payments for future research and development activities
should be deferred and capitalized until the goods have been delivered or the
related services have been performed. If an entity does not expect the goods to
be delivered or services to be rendered, the capitalized advance payment should
be charged to expense. This consensus is effective for fiscal years beginning
after December 15, 2007. The initial adjustment to reflect the effect of
applying the consensus as a change in accounting principle would be accounted
for as a cumulative-effect adjustment to retained earnings as of the beginning
of the year of adoption. We do not believe that our adoption of EITF
07-03 in the first quarter of 2008 will have a material impact on our financial
statements.

FORWARD
LOOKING STATEMENTS

In addition to
historical information, this report contains forward-looking statements. You
can identify these forward-looking statements by their use of words such as anticipate,
assume, believe, estimate, expect, forecast, intend, may, plan,
project, target, will and other words and terms of similar meaning. You
also can identify them by the fact that they do not relate strictly to
historical or current facts. All statements which address operating
performance, events or developments that the Company expects or anticipates
will occur in the future, such as projections about its future results of
operations, its financial condition, research, development and
commercialization of its products and anticipated trends in its business are
forward-looking statements.

In this report we
make forward-looking statements regarding our drug development pipeline and our
Phase 1 and 2 monotherapy and combination therapy clinical trials involving ARQ
501 and ARQ 197, and the second generation ACT compound, ARQ 171. Additional
forward-looking statements relate to our agreement with Kyowa, including
potential future milestones and royalty payments that could result from the future
development of ARQ 197.

Drug development
involves a high degree of risk. Only a small number of research and development
programs result in the commercialization of a product. For example,
pre-clinical efforts associated with our product pipeline may fail or prove
disappointing because our technology platform did not produce candidates with
the desired characteristics. Animal xenograft pre-clinical studies may be
unpredictive of human response. Positive information about early
stage clinical trial results will not ensure that later stage or larger scale
clinical trials will be successful.

Furthermore, our
drugs may not demonstrate promising therapeutic effects; in addition, they may
not demonstrate appropriate safety profiles in ongoing or later stage or larger
scale clinical trials as a result of known or as yet unidentified side effects.
The results achieved in later stage trials may not be sufficient to meet
applicable regulatory standards. Problems or delays may arise during clinical
trials or in the course of developing, testing or manufacturing our drugs that
could lead us or our partner to discontinue development.

18

Even if later
stage clinical trials are successful, the risk exists that unexpected concerns
may arise from analysis of data or from additional data or that obstacles may
arise or issues be identified in connection with review of clinical data with
regulatory authorities or that regulatory authorities may disagree with the
Companys view of the data or require additional data or information or
additional studies. Also, the planned timing of initiation of clinical trials
and the duration and conclusion of such trials for our drugs are subject to the
ability of the company to enroll patients, enter into agreements with clinical
trial sites and investigators, and other technical hurdles and issues that may
not be resolved.

We also make
forward-looking statements regarding the adequacy of our financial
resources. Our capital resources may not be adequate because our cash
requirements may vary materially from those now planned depending upon the
results of our drug discovery and development strategies, the outcomes of our
clinical trials, our ability to enter into additional corporate collaborations
in the future and the terms of such collaborations, results of research and
development, the need for currently unanticipated capital expenditures,
competitive and technological advances, acquisitions and other
factors. Additionally, our corporate collaborators may terminate
their agreements with us, thereby eliminating that source of funding, because
we may fail to satisfy the prescribed terms of the collaborations or for other
reasons.

We cannot
guarantee that we will be able to develop any of our drug candidates into a
commercial product generating revenues. If we experience increased
losses, we may have to seek additional financing from public and private sales
of our securities, including equity securities. There can be no assurance
that additional funding will be available when needed or on acceptable terms.

The factors, risks
and uncertainties referred to above and others are more fully described under
the heading Risk Factors in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2006 filed with the SEC on March 12, 2007, as updated
from time to time in our subsequent Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K. The forward-looking statements contained herein
represent the judgment of the Company as of the date of this report. We
are not under any obligation, and we expressly disclaim any obligation, to
update or alter any forward-looking statements, whether as a result of new
information, future events or otherwise, except to the extent required by law.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

As part of our
investment portfolio we own financial instruments that are sensitive to market
risk. Our investment portfolio is used to preserve our capital until it is used
to fund operations, including our research and development activities. None of
these market-risk sensitive instruments are held for trading purposes. We
invest our cash primarily in money market mutual funds and U.S. federal and
state agency backed obligations and other investment grade debt securities.
These investments are evaluated quarterly to determine the fair value of the
portfolio. Our investment portfolio includes only marketable securities with
active secondary or resale markets to help ensure liquidity. We have
implemented policies regarding the amount and credit ratings of investments.
Due to the conservative nature of these policies, we do not believe we have
material exposure from market risk.

The carrying
amounts reflected in the Condensed Consolidated Balance Sheet of cash and cash
equivalents, trade receivables, and trade payables approximate fair value at
June 30, 2007 due to the short-term maturities of these instruments.

ITEM 4. CONTROLS AND PROCEDURES

Under the
supervision and with the participation of the Companys President and Chief
Executive Officer and Chief Financial Officer (its principal executive officer
and principal accounting and financial officer), the Company has evaluated the
effectiveness of the design and operation of its disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
and Exchange Act of 1934, as amended).
Based on that evaluation, the President and Chief Executive Officer and
Chief Financial Officer have concluded that these disclosure controls and
procedures as of June 30, 2007 are effective in recording, processing,
summarizing and reporting the financial results of the Companys
operations. There were no changes in the
Companys internal controls and procedures over financial reporting during the
quarter ended June 30, 2007 that have materially affected, or are reasonably
likely to materially affect, the internal control over financial reporting.

19

PART II - OTHER
INFORMATION

ITEM 1.  LEGAL PROCEEDINGS. None.

ITEM 1A. 
RISK FACTORS. For
information regarding factors that could affect the Companys results of
operations, financial condition and liquidity, see the risk factors discussion
provided under Risk Factors in Item 1A of ArQules Annual Report on Form 10-K
for the year ended December 31, 2006, as filed with the SEC on March 12, 2007,
as updated from time to time in our subsequent Quarterly Reports on Form 10-Q
and Current Reports on Form 8-K. See
also, Forward-Looking Statements included in this Quarterly Report on Form
10-Q.

ITEM 2. 
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.

ITEM 4. 
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

The Company filed a
current report on Form 8-K on May 29, 2007 to report the results of matters
submitted to a vote at the Annual Meeting of Stockholders held on May 18, 2007,
which is incorporated herein by reference.

ITEM 5. 
OTHER INFORMATION.
None.

ITEM 6.  EXHIBITS.

EXHIBIT
NO.

DESCRIPTION

1.1

Underwriting Agreement, dated June 13, 2007 (1)

10.1+

Exclusive License Agreement, by and between the
Company and Kyowa Hakko Kogyo Co., Ltd.(2)

(1) Previously filed as Exhibit 1.1 to
the Companys Current Report on Form 8-K dated June 15, 2007, and incorporated
herein by reference.

(2) Filed
herewith.

+ Certain confidential
material contained in the document has been omitted and filed separately with
the Securities and Exchange Commission pursuant to Rule 406 of the Securities
Act of 1933, as amended, or Rule 24b-2 of the Securities and Exchange Act of
1934, as amended.

20

ARQULE, INC.

SIGNATURES

Pursuant to the
requirements of the Securities Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.